Analysis of Q1, Q2 Fleet Market Conditions in Brazil

Although Brazil is ranked as the ninth-largest economy in the world in 2015 based on its R$5.9 trillion gross domestic product (GDP), its economy is contracting.

From 2000 to 2012, Brazil was one of the fastest-growing economies in the world, but Brazil’s economic growth started to decelerate in 2014 by decreasing to 0.1% YoY, then another -3.8% in 2015 YoY, and is expected to shrink once again by another 3% or 4% in 2016.

Today, Brazil is facing both a political and economic crisis.

As of press time, the political crisis arose from an investigation into corruption at the state-run oil company Petrobras, which placed under investigation the speakers of both houses of Congress, 12 senators, and 22 congressmen from five parties. The political crisis reached a growing when the lower chamber of the Brazilian Congress voted April 17 to open the process for impeachment of President Dilma Rousseff, who was chairwoman of Petrobras’ board of directors from 2003 to 2010, when much of the alleged corruption took place.

This political crisis is playing out concurrently with the economic instability that is contracting Brazil’s domestic markets for all business segments. The economic uncertainty is so severe that it is causing some businesses to move their operations out of Brazil.

In addition to manufacturing, the other key segments of the Brazilian economy are agribusiness, petroleum exports, and commodities. These segments have been impacted by decreased global demand for its commodities, especially due to the sluggish Chinese economy, which is Brazil’s No. 1 trading partner.

One silver lining to the current economic crisis is that the Brazilian currency — the real — was devaluated, which boosted exports by increasing the competitiveness of the country’s agricultural goods and raw material commodities in the world markets. In May 2016, the real was valued at 3.5 reals to US$1. Brazil continues to export the same volume of crude oil as in 2014, but for much less money.

The automotive industry is a critical sector of the Brazilian economy. With a population of almost 209 million people, Brazil is the largest fleet market in South America. The automobile market in Brazil shrunk approximately 28% in 2015 and is forecasted to shrink another 12% in 2016. Manufacturing idle capacity for the auto industry is running around 40%/45%.

“In 2015, the overall market (fleet and retail combined) was 2.56 million units sold. Comparing this volume to 2014, which was 3.5 million units sold, there were almost 1 million fewer units sold in 2015. There was also a big drop for fleet sales, as well,” said Marcelo Tezoto, South America fleet manager for GM Brazil.

One consequence to the economic uncertainty is that consumer confidence in Brazil is at the lowest level since 2008. “People have money, but they are fearful of losing their jobs and are reluctant to spend money,” said Tezoto.

Similar to automotive retail sales, fleets sales are also decreasing in Brazil; however, they are decreasing at a slower pace than retail sales.
Below is a breakdown of total industry-wide fleet sales by calendar-year:

• 2014 – 1 million total fleet sales.
• 2015 – 740,000 total fleet sales, representing 29% share of the total Brazilian automotive market.
• 2016 – 600,000 total fleet sales, representing 30% share of the total Brazilian automotive market. 

“Currently, the fleet market in Brazil is tough and all automotive manufacturers are using a variety of financial incentives to defend their market shares,” said Tezoto. “Despite the difficult market conditions, GM has been able to defend its market share better than the main competitors. We have been able to do so because our portfolio has options not only for companies, but also retail consumers as well.”

GM has held its own in the declining market as it has increased its market position year-over-year, as illustrated below:

• 2014 – GM is No. 3 in the total automotive market with 16.6% market share.
• 2015 – GM is No. 2 in the market with 15.1% market share.
• 2016 – GM is No. 1 in the market with 15.8% market share in the first quarter of the year.

In addition, government fleet sales are slowing, as government revenues decline. Both federal, state, and local governments are not acquiring the same volume of vehicles as in prior years.

Size of the Fleet Market

One challenge facing fleet managers in Brazil is the geographic dispersion of fleets due to the country’s massive size.

Out of the approximately 4 million corporate vehicles in Brazil, more than half are located in the Southeast region of the country, which contains the major population centers, including Rio de Janiero and Sao Paulo.

The strongest vocational segments acquiring commercial vehicles are pharmaceutical, agribusiness, and food companies. There is also a strong demand for fleet vehicles by rental companies.

“The fleet sales focus we have in Brazil is big companies, while small companies are serviced by the dealers,” said Tezoto. GM has 578 dealer points in Brazil.

Examples of multinational companies operating major fleets in Brazil are Bayer, Proctor & Gamble, Pfizer, Monsanto, Merck, Siemens, Honeywell, Nestlé and Johnson & Johnson.

But the majority of fleets are smaller with the average fleet size in Brazil around 100 units.
Brazilian fleets, on average, replace company vehicles using a 24- to 36-month cycling policy; however, some companies keep vehicles in service for longer periods of time.

Fleet Acquisition Preferences

Brazil imposes 35% import duties to “incentivize” commercial companies to buy vehicles that are produced locally. Not only does the 35% import duty apply to vehicles, but also to imported replacement parts that will be needed during the course of a vehicle’s service life.

There are no import duties for vehicles exported from countries that have free trade agreements with Brazil, such as Mexico. However, the free trade agreement applies to only a specific number of vehicles, and, once this volume is reached, all future imports are hit with the 35% import duty.

In terms of total market acquisition trends, the compact SUV is one of the fastest-growing vehicle segments in the Brazilian market.

“With the launches of the Honda HR-V and Jeep Renegade, together with all the vehicles already in the market, such as the Chevrolet Tracker, the compact SUV segment is experiencing a big incremental volume compared to last year,” said Tezoto.

Brazil is the largest market for Chevrolet outside of North America and GM is looking to further expand its service offerings to Brazilian fleets and retail buyers. In 2015, General Motors launched OnStar in Brazil as standard equipment on the 2016 Chevrolet Cruze and Cobalt.

“There have already been eight cases where stolen vehicles equipped with OnStar were recovered within two hours,” said Tezoto. “OnStar has also helped to lower insurance costs.”

Fuel Price Trends

Historically, imported oil accounted for more than 70% of the country’s oil needs, but Brazil succeeded in becoming self-sufficient in oil in 2007.

Despite this, current fuel prices in Brazil are increasing. Contributing to the increased cost of fuel are government taxes on gasoline and diesel products, which were increased Feb. 1, 2015. These taxes on gasoline and diesel make ethanol less expensive, which the Brazilian government is looking to promote since it is domestically produced.

“Because of the economic and political crises, fuel prices are going up. Companies are looking for flex-fuel vehicles that use a blend of ethanol and gasoline. Diesel is another fuel growing in popularity as more pickup trucks are equipped with diesel engines,” said Tezoto.

Used-Vehicle Market

The used-vehicle market is very strong in Brazil, especially when compared to the new-vehicle market.

While new-vehicle sales have declined, the used-vehicle sales activity is very robust, as Brazilian consumers seek lower-cost transportation.

“The used-vehicle market is much better than the new-vehicle market. Even though there has been a decrease in volume in the used-vehicle market versus last year, it is lower than the decrease in sales in the new-vehicle market,” said Tezoto.

Many Brazilian consumers favor used vehicles over new vehicles because they can get more vehicle content at a lower price. The current economic conditions in Brazil are also prompting some smaller companies to buy used vehicles for their fleets in order to decrease capital expenditures.

“Vehicle depreciation rates vary and are influenced by engine displacement, size of the vehicle, brand, and other variables. A small vehicle has, on average, 10% to 20% depreciation after the first year. A large vehicle, such as an SUV, has around 26% depreciation after the first year of usage,” said Tezoto.

Interest Rates & Taxation

The government of President Rousseff has raised existing taxes and introduced new taxes in an effort to balance Brazil’s budgetary deficit caused by the country’s steep recession.

There are a number of sales taxes specifically based on the type of vehicle and its powertrain. “Taxation depends on the engine size, type of vehicle, and the segment to which it belongs. For instance, a vehicle with 1.0L engine has a lower taxation rate than a 2.0L engine, which has a lower tax rate than 2.1L engine. Pickup trucks have fewer taxes than passenger cars,” said Tezoto.

The reason pickups are taxed less than cars is because they are construed as being predominantly used as business vehicles, and the government tries not to penalize businesses with its tax program. Also, SUVs are taxed at a higher rate than cars and trucks.

Brazil’s central bank continues to keep the benchmark Selic rate at 14.25%, one of the highest in the world. The central bank is using the higher interest rates to keep a lid on inflation, which is currently at 10%.

When coupled with inflationary pressures present in the Brazilian economy, higher interest rates are increasing fleet vehicle acquisition costs and the expense of other fleet-related services.

“The higher interest rates are impacting consumers’ ability to finance new-vehicle purchases, which is forcing many to buy lower-priced used vehicles,” said Tezoto.

Editor's note: This article first appeared online in the Q1 - Q2 Global Fleet Market Conditions supplement magazine June 2016.